So you’ve gone from someone who didn’t understand the difference between stock and commodities in your OP to someone claiming advanced knowledge of economics. You think anyone is buying that?
And what happens if several thousand, or several tens of thousands, of people think that oil is going up, and decide to trade in options on oil futures because they are not actually interested in obtaining the commodity?
Could they have an effect on the price of the commodity whose futures options they are buying and selling? I assume yes.
If yes, then a bunch of people who have no interest in ever buying a single barrel of oil can move its price higher, right?
Of course, the people at the end of the bubble will pay a steep price for their foolish investing, but that is the case in any other such bubble (like people who bought pets.com). The difference is that in the case of pets.com, only people who invested in it were affected by the foolish investing. In the case of oil, all consumers will be adversely affected by the foolish investing.
Nice strawmen you like to construct.
Nowhere did I claim that I have “advanced knowledge of economics”.
Why don’t you cut it out with the word games and either provide some citations why supply and demand (esp. the factors illustrated by an expert in the field that I quoted earlier) doesn’t adequately explain the price points of commodities or just stop saying that elementary economics doesn’t explain why oil is at the price it is at right now.
May 5: Oil at $116
May 8: Oil at $123
What has changed (from a fundamentals point of view, supply/demand/risk) from May 5 to May 8?
- The geopolitical situation has not changed in the past 3 days (no news from Iraq, Iran, etc)
- Demand has not surged in 3 days’ time
- Supply has not diminished in 3 days’ time
Yet, oil increased by 6%
Where is that increase coming from?
I told you in my first post to this thread that stock isn’t equivalent to oil (or other commodities) futures. However, let me turn it around since I know the answer to this and am unsure if you do…what do YOU think will happen?
I thought this might be helpful to you so figured I’d post it. After you read through it then look back at the questions you asked and see if you still have the same questions, ehe?
Here is the key bit:
-XT
In addition, even though of course they do not speak for you, xtisme and Lemur866 stated
xtisme
“I grasp the concept of speculative bubbles just fine. I grasp the fact that they can and will and have happened in the oil industry.”
Lemur866
“Of course bubbles are possible in the oil market. Who’s denying it? No one”
So, unless you disagree with them, you do agree that bubbles occur.
If you agree that they do occur, by whatever mechanism, it implies that the price during those times is not explained by elementary economics.
Are options to buy, say, Apple stock similar to options on oil futures?
That is, you pay for the right, but not the obligation, to buy (or sell) something by a specific date at a specific price.
Is this correct?
If yes, does the trading of stock options affect the value of the underlying stock?
If yes, does the trading of commodity futures options affect the value of the underlying commodity?
Thanks for the link, by the way. I’ll take a look.
Appeal to ignorance. If you’re attempting to prove something, try harder. I say again, Caruso has already explained in perfectly understandable terms why the price of oil is rising.
Nobody is disputing that bubbles occur, and while there are many ideas why bubbles occur, the insinuation that a bubble that overprices a commodity by a factor of two, five, or nearly ten is possible is something that we’re all saying is basically chicken-littleism along the lines of, we could be hit by a comet tomorrow or the sun might explode on Monday.
You haven’t explained why you think anyone would buy oil at price that are at such wide variance with current demand, whether that price would be $250 or $1,000. Why would someone plunk down such vast sums on oil they couldn’t hope to sell?
Have I missed some geopolitical piece of news? Or news about sudden increase in demand?
Are there other reasons why the price of oil would increase by 6% in 3 days?
Do let us know what, from a fundamentals point of view, could have caused this 6% increase in 3 days.
This doesn’t make any sense.
First, as has been noted in this thread, you can trade options on oil futures, and avoid having to buy a single barrel of oil. So, you never have the problem of owning some oil that you “couldn’t hope to sell”.
Second, on why anyone would buy oil at a price that is at such wide variance with current demand, the issue is that nobody decides to suddenly pay $400 for something that is selling for $100. But, as noted above, oil today is $123 while it was $116 three days ago, and below $100 several days ago. So either demand for oil increased dramatically over the past few days, or we are currently paying a price at variance with existing demand, or we were paying a price several days ago that was at variance with existing demand.
Not only are you trying to reverse the burden of proof in this debate (by having me disprove your allegations about speculation), but it seems you are not keeping up with the news.
From the Associated Press:
You can by oil futures with no intent to take delivery of, but if you cannot find anyone to buy at your sell price, you will be left holding the barrel and will take delivery of it (ok there are methods to liquidate the contract, but they are generally poor economic propositions for a trader).
Who ever you sell to will have to take delivery (or maybe several people down the chain) but eventually someone will take delivery. They will not buy a contract which they have no hope of selling, thus if you are selling a contract at 1,000 but there is no eventual physical demand for a bbl of oil at 1,000 no one will buy your contract, so you better go hire some tanker trucks.
When trading in oil contracts there is some degrees of separation from the actual supply and demand, and certainly an inrush of investment dollars to all the commodities has raised prices, however the link to actual supply and actual demand is still there, if a little more obscured.
When looking at prices you also need to be careful what price you are looking at, is it a 3 month 6 month or spot price contract. Spot price is for people who need physical delivery right now, so those purchaser pressures (eg holy crap we need 500,000 bbls of bonny light to keep our refinery at capacity because the Alaska pipeline sprung a leak again, we will pay anything) are different to the longer term contracts and speculators
Also note that the nymex is not the only exchange , and it is still possible to go and buy deliveries from all manner of places other than a futures contract, so a speculative bubble on one market may affect other exchanges and to a certain extent other purchasing methods, but it is not a 100% link.
So yes speculation and increasing investment in oil futures can raise the price, but the supply and demand link is still present and will impact everyone in the trading chain, there are daily and weekly limits in price changes to the futures contracts to prevent sudden spikes (quoted upthread) and other markets are available to cushion speculative bubbles in one market. So the $1000 bbl overnight spike is not going to happen.
Just another random data point, it was mentioned upthread that Saudi could just crank open the tap a little to up production and did not have to invest much in new drilling and technology. This is not the case, Saudi and the UAE used to be a technology dead spot, vertical post holes everywhere. Today the service companies (Schlumberger, Halliburton , Baker etc) are focusing on Saudi and UAE due to the huge increase in new technology being used. The old post hole method would get oil, but not sustainable production. Saudi now is a hot bed of advanced drilling techniques using all manner of reservoir steering tools, and probably the premier place for intelligent completions. Boosting and sustaining Saudi production is a big money deal right now and not just cracking open a gate valve a fraction.
Traders should listen to the SDMB:
- Buy vastly overpriced commodities
- ???
- Profit!
How are options on oil futures any different than options on stocks?
In both cases, when the expiration date of the option arrives, if the asset price is not higher than your target price, you are left with useless options on your hands, i.e. you lose money.
Just because one type of option happens to have a commodity behind it does not fundamentally alter the situation for the trader. You could be stuck with a load of worthless paper in both cases.
Hahahaha!
The media are worthless when trying to explain why some asset price goes up or down.
If the price goes up that day, they look around for news on that day that would jive with the theory of why that asset goes up (e.g. “Serious bomb attacks in Iraq!!!”)
If the price goes down that day, they look around for the opposite news (“Consumer confidence up!!!”)
They have zero predictive value. In most cases, both pieces of news were known before the market opened. The “analysts” just couldn’t predict which way the price would go. Of course, after the fact, they are happy to point to the piece of news that “caused” the price movement.
If weathermen were like market analysts in the media, they would come on TV every night and explain why it rained that day, why it was hot that day, etc. They would be useless if they had zero predictive value.
If the system is so complex that, even if you know all the pieces of information you still can’t predict how the price will react, what is the point of coming up with theories of “why” some price movement happened?
One of my favorite examples of idiotic attempts to describe what is going on in the market:
I guess your response to being proven wrong is to blame it on the media. Very strong move. Did you learn that from the Republican Party?
AFAIK he’s a fervent Democrat, so…
I think the discussion has gone as far as it can considering. I don’t see any point in continuing at this point anyway.
-XT
I’m still not clear what Polerius thinks we should do about this potentially devastating hypothetical crisis of oil at $1000/barrel.
It seems he’s challenging us to guarantee that the price of oil could never get that high, and since we can’t, then something should be done.
But what?
OK a futures option is not different to a share option, but I was talking about a futures contract.
With a futures contract you are paying to take 1,000 bbl of oil, so one contract cost you $123,000 at $123/bbl. Buying a futures contract is the same as actually buying a share, except it gets delivered in 3 or 6 months. If you want to get rid of the share you have to sell it to someone at some price making a loss or gain, or elect not to sell, in which case you still have the share. If you have an oil contract you will have to take delivery of the oil. By trading in oil futures (or a direct equity) contracts you are affecting the liquidity in the market for that specific contract/share, and are linked into the whole real world supply and demand for that item.
I am sure you know how options work, and a futures option would work in the same way as an equity option, and sure you can close out the option without taking delivery of anything. However option values and the number of options taken are not a big driver on the price of the underlying commodity or share, excepting where the volume of options being closed with an actual exchange settlement affects the volatility in the market. The value of the option is driven by the underlying share price, volatility and time to expiration.
cheers
NBC
Nope.
(Both the Democrats and Republicans have ideas I agree and disagree with)